Earnings Call Transcript - NBY Q2 2024

Operator, Operator

Good day, and welcome to the NovaBay Pharmaceuticals Second Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Jody Cain, please go ahead.

Jody Cain, Investor Relations

This is Jody Cain with LHA. Thank you for participating in today's call. Joining me from NovaBay Pharmaceuticals are Justin Hall, Executive Officer and General Counsel; and Tommy Law, Interim Chief Financial Officer. I'd like to remind listeners that comments made during this call by management will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from any anticipated results. In particular, there is uncertainty about circumstances beyond the company's control that impact the broader economy. This means that results could change at any time and the contemplated impact of such circumstances on NovaBay's operations, financial results, and outlook is the best estimate based upon information available for today's discussion. For a list and description of risks and uncertainties, please review NovaBay's filings with the Securities and Exchange Commission, which are available at sec.gov. Furthermore, the content of this conference call contains information that is accurate only as of the date of the live broadcast, August 13, 2024. NovaBay undertakes no obligation to revise or update statements to reflect events or circumstances, except as required by law. And now I'd like to turn the call over to Justin Hall. Justin?

Justin Hall, Executive Officer and General Counsel

Thank you, Jody. Good afternoon, everyone, and thank you for joining us. We are reporting another quarter of growth in our eyecare business, driven by sales of Avenova branded products through our OTC online channels. For the first half of 2024, sales from eyecare products reached $4.8 million, giving us confidence in reaching our goal of approximately $10 million for the year. This revenue growth is efficient growth with sales and marketing spend for the quarter down 13% over the prior year. Our ability to continue growing our eyecare product sales while lowering marketing expenses is a testament to our digital marketing expertise and the high quality of our products, which has given rise to an extremely loyal base of customers who generate recurring revenue. Over the past several years, our base of repeat customers has grown steadily and consistently. In fact, the number of Avenova Subscribe & Save customers on Amazon, our largest sales channel, increased by a formidable 123% since the beginning of 2022 and is up 64% since the beginning of 2023 and is up 16% for the first six months of 2024. It's no surprise that given these increases that satisfaction with our products is exceedingly high, with the Avenova Lid & Lash Solution online rating for more than 14,000 customers averaging an impressive 4.5 stars. The importance of our loyal customer base cannot be overstated. In fact, subscription sales accounted for approximately 24% of all online Avenova revenue for the first half of this year. Importantly, recurring sales from these customers provide us with predictable revenue upon which to build future sales, which in turn allows us to efficiently manage our sales and marketing spend. We also attribute growth in our eyecare business to the expansion of our Avenova branded product portfolio in recognition that dry eye can be a multifaceted stubborn and complex condition that may require more than one approach to manage. We now have products that address each step of the standard at-home dry eye treatment regimen. Our scientifically developed best-in-class portfolio includes our flagship Avenova Lid & Lash Solution as well as lubricating eyedrops for instant relief, a warm eye compress to soothe irritated eyes, and the i-Chek to monitor physical eyelid health. The U.S. dry eye market is rapidly growing and is expected to exceed $4.8 billion by 2030. Among the factors impacting the prevalence of dry eye are increased computer time and smartphone usage, the aging population, heightened awareness of this condition, and improved diagnostic capabilities. The fact that dry eye can be a complex condition was corroborated by a recent survey of 337 optometrists across the U.S. that was published in the Eyes on Eyecare 2024 Dry Eye Report. According to the survey, more than 80% of respondents found dry eye diagnosis in treatment moderately to extremely important in generating revenue for their practices, and respondents estimated that more than two-thirds of their patients have some form of dry eye disease. Dry eye was ranked as the second leading area of specialization, exceeded only by primary eye care, and is expected to account for 43% of their clinical focus over the coming 12 months. This is up from only 17% in 2023. Importantly, the report recommended that a personalized treatment approach may be essential in the successful management of dry eye. In a further effort to help manage the multifactorial nature of dry eye, we expanded our Avenova product bundles to provide personalized collections. Our new Avenova Total Eye Health, Dry Eye Essentials, and the Clean & Relieve bundles provide individuals with personalized product options at a discounted price. The Eyes on Eyecare Survey specifically identified daily lid and lash hygiene as one of the top three approaches for patients with dry eye disease, and hypochlorous acid as a top approach for lid and lash hygiene. The cornerstone of each of our new personalized product bundles is the Avenova Lid & Lash Solution, which is formulated with our proprietary pure hypochlorous acid, differentiating it from other hypochlorous acid sprays in the market. You may have seen our recent announcement regarding record Amazon Prime Day sales of our Avenova products. During the two-day event, which was held on July 16 and 17, we offered a 20% discount to reward loyal customers with great pricing on their products that they rely on while attracting new customers and providing us with the opportunity to convert them into subscribers. Over this year's two-day event, Avenova sales were 17% higher than Prime Day 2023 and 40% higher than Prime Day 2022. Now I'd like to turn the call over to Tommy to review our financial results. Tommy?

Tommy Law, Interim Chief Financial Officer

Thank you, Justin, and good afternoon, everybody. I'll review Q2 and the six months results, followed by our cash position. But before we start, I'd like to mention that the financial results for all the periods I'll be discussing today do not include any results from DERMAdoctor. Financial information related to DERMAdoctor can be found in the Form 10-Q that we are filing today under the heading Divestiture and Discontinued Operations. Now turning to our quarterly results. Total sales net for the second quarter of 2024 were $2.4 million. Essentially, all revenue for the quarter was derived from sales of eyecare products, which increased 8% over the prior year and were driven by higher Avenova branded products sold through our OTC online channels. Total sales net for the second quarter of 2023 were $3.5 million. Those sales were comprised of $2.2 million from eyecare products and $1.3 million from wound care products, which included an unusually large order of the NeutroPhase branded wound care product. Gross margin on net product revenue for the second quarter of 2024 was 66% compared with 49% for the second quarter of 2023. The improvement was primarily due to the increase in sales of higher-margin eyecare products and a decrease in sales of lower-margin wound care products. Sales and marketing expenses for the second quarter of 2024 of $1 million declined 13% from the prior year as we continue to benefit from efficiencies from our digital advertising expertise. G&A expenses for the second quarter of 2024 and 2023 remain consistent at $1.6 million. Noncash items for the second quarter of 2024 included a loss on the change in fair value of warrant liabilities of $80,000 and a loss on the change in fair value of embedded derivative liability of $83,000. Noncash items for the second quarter of 2023 included a gain on changes in fair value of warrant liabilities of $216,000 and a gain on change in fair value of embedded derivative liability of $40,000. Accretion of interest and amortization of discounts on convertible notes for the second quarter of 2024 was $0.3 million compared with $0.5 million for the second quarter of 2023. Other expense net for the second quarter of 2024 was $69,000 compared with $0.4 million for the second quarter of 2023, with the decrease due primarily to higher finance costs in the prior year period. Net loss attributable to common stockholders for the second quarter of 2024 was $1.6 million or $1.37 per share. This compares with a net loss attributable to common stockholders for the second quarter of 2023 of $4 million or $44.43 per share, which included a $2 million noncash increase to accumulated deficit due to an adjustment to preferred stock conversion price. Turning to the six months results. Net sales for the six months ended June 30, 2024, were $5 million. This compares with $5.9 million for the six months ended June 30, 2023, which included the large wound care product order as mentioned earlier. Sales of eyecare products for the first half of 2024 of $4.8 million compared with $4.4 million from the prior year period. Gross margin on net product sales for the first half of 2024 increased to 67% from 57% for the first half of 2023. For the six months ended June 30, 2024, sales and marketing expenses decreased 14% and G&A expenses increased 18%, both compared with the six months ended June 30, 2023. The increase in G&A expense was primarily due to higher nonrecurring strategic initiative costs, including the DERMAdoctor divestiture. We also incurred a $0.9 million expense in the first half of 2024 related to the DERMAdoctor divestiture with no comparable item in the first half of 2023. Net loss attributable to common stockholders for the first half of 2024 was $5.2 million or $5.57 per share. This compared with a net loss attributable to common stockholders for the first half of 2023 of $5.8 million or $77.42 per share. Turning to our balance sheet. We had cash and cash equivalents of $0.8 million as of June 30, 2024. We completed an underwritten public offering late last month, raising gross proceeds of approximately $3.9 million, which included a partial underwriter's over-allotment. Investors have since exercised all the prefund awards from the public offering with an outstanding share count now at approximately 4.9 million shares. The F-1, F-2, and F-3 warrants remain outstanding, each with a one-time reset of the exercise price to the lesser of the current exercise price or 90% of the volume weighted average prices for the five trading days immediately preceding the 60th calendar day after issuance. And now I'll turn the call back to Justin.

Justin Hall, Executive Officer and General Counsel

Thanks, Tommy. As Tommy just mentioned, we completed a capital raise last month that will allow us to pursue some strategic and fundamental transactions from a position of strength. Among these options is a possible transaction that would fundamentally change our business, and we look forward to providing more details at the appropriate time. In the meantime, we continue to focus on our established position in the large U.S. dry eye market and to continue efficiently growing our sales of our best-in-class Avenova products. We're managing our sales and marketing expenses through optimized digital programs, which allow us to build on the predictable recurring sales from our loyal customer base. So with that overview of our business and our recent financial performance, I thank you for your attention. Operator, we're now ready to take questions.

Operator, Operator

We will now begin the question-and-answer session. Our first question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Destiny Buch, Analyst

Hey, Justin and Tommy, this is actually Destiny on for Jeff. Thank you for taking our questions. I wanted to start. I know in the comparable period, you did have some revenue based on the wound care product. I'm just wondering if you have anything to call out there or should we expect any other kind of stocking orders? I know it’s really lumpy and hard to kind of predict, but I'm just curious if you have any commentary around that?

Justin Hall, Executive Officer and General Counsel

Yes. So we should see some orders in the remainder of the year. But they're not going to be, I think, as material or as large as they were in 2023. But we'll continue to see some orders later this year and then, of course, into 2025.

Destiny Buch, Analyst

Okay. Got it. So largely unchanged, got it. And then can you give us some more idea or not idea, more color on the changes in these efficiencies for your marketing strategy? Is it an increased ROAS or return on ad spend? Is there another metric that you're using to kind of determine what's working and what's not? Can you give us a little more color there?

Justin Hall, Executive Officer and General Counsel

Sure. Absolutely. It's a good question because it's a main focus of our business. We are trying to become just really better at what we're doing. So we really shifted the strategy about a year ago where we moved away from spending a lot of money in the top of the funnel and spending a lot of money in customer acquisition cost and turned our approach on its head, where we're really focusing on our Subscribe & Save customers right now. So after being in the market for eight or nine years, almost 10 years now with Avenova, a lot of people have tried the product and they just need reminders to buy the product again. So the best-case scenario for us is those customers because it's a personal consumable product. Best-case scenario is for those customers to become a Subscribe & Save customer. But we realize that not everybody is. So I think have done a really good job of getting people into subscriptions on our website and also on Amazon. So when we get somebody into the subscribe and save program, that means that we don't need to spend any money to make that money. And that is incredibly efficient for us. So that frees up a little bit more money to go after new customer acquisition or just reminding those customers who want to repeat purchase that they need to go on and do a one-time repeat purchase. So over the past 12 years, we've really changed the strategy from filling the top end of the funnel, which is inefficient, to really focusing on growing that community of users and getting them into the Subscribe & Save program, where we don't have to spend any money to make that money.

Destiny Buch, Analyst

Okay. That makes sense. Got it. And then what portion of your revenue is now generated from those Subscribe & Save program? And then I'm also curious, how often are your customers receiving product? Is it monthly? Is it every two months, three months? Can you give more color there?

Justin Hall, Executive Officer and General Counsel

Sure. Yes. Absolutely. So one of the metrics that is easy to remember and that we like to share is that about a quarter of all of our online revenue comes from Subscribe & Save. So that's really substantial. So just having a quarter of our revenue, we know that it's going to come in every single month, and we know exactly what it's going to be. And then as I mentioned earlier, we don't need to spend any money to make that money. So it's a significant chunk about a quarter. So we really like that. And customers tend to buy about every month. There are some people who like to be a little bit more thrifty with their use of the spray and they may stretch it out so they get one bottle every 45 days. On the outside end, it’s one every 60 days. But looking at our data, it's the majority of our Subscribe & Save customers buy one bottle per month.

Destiny Buch, Analyst

With Prime Day occurring in the third quarter, do you expect to see an increase in Q3 compared to Q2 and Q4? Or will growth remain consistent throughout the year? I'm trying to understand if there is still a chance for sequential revenue growth in Q4, even with the impact of Prime Day.

Justin Hall, Executive Officer and General Counsel

Destiny, I know you're looking for numbers to plug into the model. I understand what you're asking, and it's a fair question. We normally have a stronger Q4. We do a push in our physician-dispensed channel towards the end of the year. We also do a back-to-school push. So we tend to have a stronger Q4. So what we're looking at is incremental increases in Q3 with a pretty strong Q4.

Destiny Buch, Analyst

Okay. Okay. Got it. That's enough for my model. I appreciate that. And when you touched on the physician-dispensed channels, can we talk a little bit more about that? I didn't hear too much commentary in your prepared remarks.

Justin Hall, Executive Officer and General Counsel

Yes. So the physician-dispensed channel plays an outsized role sort of strategically in building the brand. So our lowest customer acquisition cost, which is one of the metrics that we look at for efficiency and success in the online sales channel. Our lowest customer acquisition cost and our stickiest customer is when a patient learns about Avenova through their doctor. So we really try and push the physician-dispensed channel, not only for the revenue that it creates on its own and independently as its own sales channel, but the way that it introduces new customers to the online sales channel. So the physician-dispensed channel for us is incredibly important to the brand. And it's incredibly important to the online sales channel because that's really how we're feeding new customers into that efficient sales channel. So we continue to push that, and we have our loyal doctors who are Avenova believers, and they buy from us every month. And then we always have a push where we do continuing education events and just continuous outreach to bring new doctors into the fold as well. But from a revenue perspective, the online sales channels really dwarf that wholesale physician-dispensed channel.

Destiny Buch, Analyst

Okay. Got it. Tommy, this question is for you. The margins seem to be quite solid. Can you share any updates regarding your supply chain? Also, what revenue level do you believe represents the optimal economy of scale?

Tommy Law, Interim Chief Financial Officer

No, there isn't really a whole lot of changes in our supply chain.

Justin Hall, Executive Officer and General Counsel

Yes. So Destiny, our margins improved over last year just because this year, we didn't have a very large low-margin wound care order. So yes. So you take a little bit off of the top line because we didn't have that $1 million order of NeutroPhase, which we had last year. So a little bit of a blessing and a curse last year. We had a larger top line, but it's a low-margin product. So it dragged down our gross margin quite a bit. So what you see this year is consistent margins around the eyecare unit. And those are all around 65%. They have remained steady. Is that right, Tommy, 65%?

Tommy Law, Interim Chief Financial Officer

Yes.

Destiny Buch, Analyst

Okay. And then one more, if I may. I'm curious about some of the partnerships or co-promotion agreements you have going on. Can you talk a bit about the agreement with Eyenovia and how that's going? And then I know you are collaborating with another company for some international markets. Are there any international markets you're looking to go in direct on your own?

Justin Hall, Executive Officer and General Counsel

We do not foresee pursuing any expansion independently due to a lack of existing infrastructure and relationships. Such an investment would be too significant for us to manage alone. Instead, we are focusing on building partnerships of various kinds and sizes. Our core business remains strong, and the eyecare segment is efficiently growing. For the rest of the year, our primary emphasis will be on these partnerships. At this time, I can only share that our main focus for the upcoming months will be on these strategic alliances and potential key transactions.

Destiny Buch, Analyst

Okay. Excellent. Thank you so much. I’ll get back in queue.

Operator, Operator

Our next question comes from Edward Woo with Ascendiant Capital. Please go ahead.

Edward Woo, Analyst

Thanks for my question. Has there been any change in distribution costs or advertising on Amazon? Thank you.

Justin Hall, Executive Officer and General Counsel

Yes, Ed, it's great to hear from you. That's a good question because, overall, advertising costs are increasing across the industry. Fortunately, we haven't experienced that. Our costs remain fairly stable, and we haven't noticed a significant rise in that area. We closely monitor ads on Google and Meta and aim to reduce spending when they become less effective, but these platforms represent a smaller part of our overall expenditures. Most of our customer acquisition, as I mentioned, comes from the physician-dispensed channel and advertising within the Amazon environment.

Edward Woo, Analyst

Great. Thanks for answering my questions and I wish you guys good luck. Thank you.

Justin Hall, Executive Officer and General Counsel

Terrific. Thanks, Ed.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Justin Hall for any closing remarks.

Justin Hall, Executive Officer and General Counsel

Thank you for joining us today and your interest in NovaBay. We're excited about our strategic focus on the large and growing eyecare market within our established eyecare business. We look forward to providing an update on our next quarterly call in November. Thanks again, and have a nice day.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.